Holding

The Court held that purchase preference for public sector enterprises cannot be imposed uniformly; it must be examined industry‑wise to determine necessity, and the substitution of ‘may’ by ‘will’ constitutes an arbitrary reversal that requires a fresh sectoral assessment before such preference can be granted.

Summary

The petitioners, a private firm (Caterpillar) and a public sector enterprise (Bharat Earth Movers Ltd.), challenged a series of Government Office Memoranda that granted purchase preference to public sector enterprises (PSEs) in procurement of earth‑moving machines by coal‑field companies. They argued that the substitution of the word “may” with “will” in the latest memorandum made the preference mandatory, creating a monopoly and violating Article 14 of the Constitution. The Court examined the history of the preference policy, noting its extensions and the shift from discretionary to mandatory language. It held that a uniform, blanket preference cannot be justified without an industry‑wise assessment of the need for such protection and that the change in language amounted to an arbitrary reversal. Consequently, the Court directed the concerned Ministry to conduct a sectoral assessment within four months and to maintain interim arrangements pending fresh reconsideration. The appeal and the petitions were disposed of.

Issues considered

Whether the Central Government's Office Memorandum granting purchase preference to PSEs, by replacing ‘may’ with ‘will’, is arbitrary and violative of Article 14 of the Constitution.
Whether a uniform purchase‑preference policy for PSEs is constitutionally valid without an industry‑wise assessment of necessity.
Whether the policy creates an unlawful monopoly and infringes the legitimate expectations of other bidders.

Legislation cited

Constitution of Indias. Article 14

Subjects

purchase preferencepublic sector enterprisesArticle 14arbitrarinessprocurement policygovernment circularlegitimate expectationmonopoly

Judgment

-.r
CATERPILLAR INDIA PVT. LTD. A
v.
WESTERN COAL FIELDS LTD. AND ORS.

MAY 18, 2007

[DR. ARIJIT PASAYAT AND S.H. KAPADIA, JJ.] B

-1 Constitution of India, 1950; Article 14:
"")
... Purchase preferences-Private sector and public sector-Machines
manufactured by Public Sector Enterprise and Private Limited Company- c
Respondent Coal Fields purchasing the machines-Allegedly purchase
preferences given to PSEs arbitrarily in terms of an Office Memorandum
issued by Government-Discrimination-Held: Before allowing such purchase
preference protection to Public Sector Enterprises as a matter of uniform
policy, necessity of such protection has to be examined individually and D
differential treatment is called for-The Central Government is directed to. do
,.,..., the industry-wise assessment in terms of the detailed directions given in the
judgment to identify such enterprises-In case there is already cost effectiveness
in any PSE, there may not be any need for the trade preference being given
to such public sector (i!nterprises.
E
Government policy-Memorandums-Substitution of the word "shall"
in place "may"-Effect of-Discussed

The petitioners/appellants have made a grievance that the key players
in the market are petitioners, a Private Sector Company and Bharat Earth
Movers Ltd., a Public Sector Enterprise. The earth moving machines F
~ manufactured by them are purchased by the respondents- Coalfields.· Prior
to 1992 purchase preference was given and the lowest and the second lowest
bidders were being described as L-1 and L-2. The purchase preference policy
kept on extending by issuing Office Memorandums to that effect The policy
was last extended for a further period of three years retrospectively with effect
G
from 18.7.2005 and the word "may" was then substituted by the word "will"
in the Circular/Office Memorandum. The legality of the Office Memorandum
was challenged by the petitioners on the ground that by substitution of the
~ word 'may' by the word 'will' is arbitrary. The word 'may' gives a wider option.

251. H
252 SUPREME COURT REPORTS (2007) 7 S.C.R.

A to the tenderers and all the tenderers were on a level playground without any ...__
unnecessary protection to any of the parties.

The issue arose for determination in these transferred petitions and
appeals was validity of Circular/Office Memorandum issued by the Central
Government providing for purchase preference to Public Sector Enterprises. ·
B
Appellant contended that the Office Memorandum whereby purchase
preference given to Public Sector Enterprises is arbitrary and effects the
)._
legitimate expectation of the various parties since it creates a monopoly and t.-.,

the policy is without any sanctity or la~. ' ~

c Disposing of the petitions and appeal, the Court

HELD: 1.1. The increase in effectiveness of Public Sector Enterprises
cannot be done on a uniform policy without examination as to whether such
protection is necessary for a particular PSE. It has to be examined individually
as to whether any differential treatment is called for. These are the aspects
D which need to be considered by the concerned Ministries. It is, therefore,
directed ttiat industry-wise assessment be done and if there is already cost .I.-
effectiveness in any PSEs there may not be any need for the preference being
given. The examination should be on the line as to whether any preference is
"
called for and what would be the margin of preference which would ensure
E level playing field. It should also be fixed specifically and while fixing the
minimum amount it should be ensured that breaking orthe quantity should
·be rational, so that there is no likelihood to introduce an element of
uncertainty. If the object was to invite foreign direct investment, the impact of
the preference on' such investment has to. be considered. It shall also be
considered as to whether some amount of discretion as was given earlier has
F to be re-introduced. There cannot be certainly any rigid inflexible policy.
Because of th~ substitution of the word 'may' by 'will' there is essentially ~
reversal of the policy. (Paras9 andlO) (255-D,.E; F•H)

1.2. The following directions are issued:

G (1) The exercise, as noted above, shall be undertaken by the concerned
Ministry ofthe Centriil Government:

(2) The interim arrangements operative presently shall continue till a "-.
fresh re-consideration is made by the concerned departments of tlie
Government of India;
H
CATERPILLAR !NOIA PVT. LTD. v. WESTERN COALFIELDS LTD. [PASAYAT, J.] 253

~
(3) The interim orders shall not be restricted to the petitioners, A
appellant and the respondents. It shall only be binding on the parties who are
IA and L-2 in the concerned transaction. While fixing the norms, the capacity
to delivery of the concerned PSEs and the competitors has also to be taken
note of. (Para 1OJ (255-H; 256-A-C)

CIVIL ORIGINAL JURISDICTION: Transferred Case (C) No. 4 of2004. B

WITH
---- ' }
T.C. Nos. 5, 11 & 12 of2004 & 3 of2005 and C.A. No. 2738 of2007.

A. Saran, B. Dutta and R. Mohan, ASGs., Anil B. Dewan, Dushyant c
Dave, K. Paragsaran, Shanti Bhushan, R.F. Nariman, R.K. Anand, Ashok H.
Desa~ Sr. Adv., Nina Gupta, Ramesh Singh, Lalit Bhasin, Shweta Chadha,
Akansha, Neha, Bina Gupta, V. Shekhar, A. Subba Rao, Anirudh Sharma,
/ Pradeep K. Dubey, V. Subramaninan, Jagdeep Dhankar, Mohit Paul, Arijit
Prasad, Anip Sachthey, S.WA. Qadri, Kiran Bhardwaj, R.C. Kathia, D.S. Mahra,
Anil Katiyar and V.K. Verma for the appearing parties. D

The Judgment of the Court was delivered by

DR. ARIJIT PASAYAT,J. l. Leave granted in SLP (C) No. 24219/2003.

2. The point involved in these cases essentially is the purchase preference E
given to Public Sector Enterprises (in short the 'PSEs'). The petitioners have
made a grievance that the key players in the market are petitioners-Caterpillar
and Bharat Earth Movers Ltd. Most important purchaser for all these are coal
fields, for example Western Coalfield and its subsidiaries-Coal India Ltd. They
are invariably the purchasers in respect of earth moving machines. Prior to 'F
-4 1992 price preference was given to PSEs. Post 1992 purchase preference was
given and the lowest and the second lowest bidders were being described as
L-1 and L-2. Purch~se orders were issued by the Coal India Ltd., broadly in
the ratio of 60/40 and the L-2 was required to match the L-1 price. The
language used earlier was "may" as indicated by Circular dated 13 .1.1992. The
purchase preference policy was extended by office memorandum dated G
15.3.1995 for a further period of two years. It was further extended till 21.3.2000
by office memorandum dated 31.10 .1997, subject to purchase being in excess
ofRs.5 crores. By office memorandum dated 14.9.2000, the policy was extended
till 31.3 .2002. However, the minimum value of purchase was brought down to
rupees one crore. By office memorandum dated 14.6.2002, the policy was
H
254 SUPREME COURT REPORTS [2007] 7 S.C.R.

A extended till 31.3 .2004 and the scheme was made valid for purchase of rupees
five crores and above. By office memorandum dated 26.10.2004, which extended
the policy for one year upto 31.3.2005 retrospectively from l .4.2004. By office
memorandum the policy was extended for a period of three years retrospectively
with effect from 18.7.2005. The word 'may' was substituted by the word 'will'
by this office memorandum. According to the petitioners the intention was
B to give somewhat longer period for stabilizing all PSEs. It never intended to
create any monopoly.
>- - .
.3. Grievance is made that by substitution of the word 'may' by the word
'will' is arbitrary. The word 'may' gives a wider option to the tenderers and ' -~
C all the tenderers were on a level playground without any unnecessary
protection to any of the parties.

4. It is pointed out that on 15.3.1995 office memorandum was issued
extending the time to purchase preference upto 31st March, 1997. It was
further re-introduced for a period of three years upto 31st March, 2000. Again,
D it was extended upto 3 lst March, 2002. By further office memorandum dated
14th June, 2002 the existing purchase preference is for products and services
to central public sector enterprise was extended by two years upto 3 lst
March, 2004. The legality of the office memorandum dated 14th June, 2002 is
challenged contending that it is arbitrary and affects the legitimate expectation
of the various parties. In fact it creates a monopoly and the policy without
E any sanctity of law.

5. The respondents opposed the petition primarily on the ground that
there is no substance in the allegations. Benefit is not given only in respect
of the parties covered by these petitions. The office memorandum dated
F 13. l .1992 was issued by the Department of Public Enterprises, Ministry of
Industry, Government of India stating that in respect of granting price
preference to PSEs, Government may grant purchase preference to PSEs by
price quoted by them which is less than l 0% of the lowest price other
conditions being equivalent. It was stated that the policy was valid for three
years period as transaction within which PSEs were to adjust to the global
G new business environment and improve competitiveness efficiency.

6. The above purchase preference policy was extended on 15.3.1995 for
a further period of 2 years and it was stated that the said extension was final
\_.
and the earlier policy would automatically lapse. During 1997 the purchase
preference was further extended upto 31.3 .2000. This was in relation to
H
CATERPILLAR INDIA PVT. LTD. v. WESTERN COAL FIELDS LTD. [PASAYAT, J.] 255
'

- purchases in excess ofRs..5 crores. By the office memorandum dated 14.9.2000
the policy was extended till 31.3 .2002 and the minimum value of purchase was
brought down to Rs. I crore from Rs.5 crores.
A

7. By Office Memorandum dated 14.6.2000 the PSEs purchase preference
was extended fora further period of2 years till 31.3.2004 and the scheme was
made valid in respect of purchase of Rs.5 crores and more. B
8, Grievance is made that with a view to show preference the practice
"'.
~
of splitting the tender was introduced. This according to the petitioners had
caused immense difficulties. By Office Memorandum dated 18.7.2005
Government of India re-introduced/extended the earlier purchase preference
policy retrospectively from 1.4.2005 for a period of 3 years till 31.3.2008. This
c
policy contains certain modified conditions which were different from the past
policies. These policies are basically under challenge. The language used
unlike the earlier policy on 14.6.2002 which used the expression that purchase
preference may be granted, was 'will'.
D
9. We find that the basic challenge is that by imposing a condition like
purchase preference no option is left and a monopoly is being created. The
}\
increase in effectiveness of PS Es cannot be done on a uniform policy without
examination as to whether such protection is necessary for a particular PSE.
It has to be examined individually as to whether any differential treatment is
called for. It is pointed out that there may be no competition left if I 0% margin E
is given. In essence, the submission is that the preference should be given
PSE specific and the margin also hafo.-1:0 be examined rationally.

10. We feel that these are the aspects which need to be considered by
the concerned Ministries. We, therefore, direct that industry-wise assessment
be done and if there is already cost effectiveness in any PSEs there may not F
~ be any need for the preference being given. The examination should be on
the line as to whether any preference is called 'for and what would be the
margin of preference which would ensure level' playing field. It should also
be fixed specifically and while fixing the minimum amount it should be ensured
that breaking of the quantity should be rational, so that there is no likelihood
G
to introduce an eleme~t of uncertainty. If the object was to invite foreign
direct investment, the impact of the preference on such investment has to be
considered~ It shall also be considered as to whether some amount of discretion
~ --( as was given earlier has to be re-introduced. There cannot be certainly any
rigid inflexible policy. Because of the substitution of the word 'may' by 'will'
there is essentially reversal of the policy. Therefore, the applications are H
256 SUPREME COURT REPORTS (2007] 7 S.C.R.

A disposed of with the following directions:

(I) the exercise, as noted above, shall be undertaken by the
concerned Ministry of the Central Government within a period of
-
4 months from today;
(2) The interim arrangements operative presently shall continue till
B a fresh re-reconsideration is mldb by the concerned departments
of the Government of India.
(3) The interim orders shall not be restricted to the petitioners,
appe1'1nt and the respondents. It shall only be binding on the
parties who are L-1 and L-2 in the concerned transaction. While
c fixing the norms, the capacity to delivery of the concerned PSEs
and the competitors has also to be taken note of.

11. Appeal and applications are accordingly disposed of.

S.K.S. Appeal & Petitions disposed of.
D